For the S&P, short-term pain means long-term gain

Avi Gilburt is author of
ElliottWaveTrader.net, a live trading room and member forum focusing on
Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts
and wave counts that is free of personal bias or predisposition. A lawyer and
accountant by training, he is also managing member of Gilburt Financial
Services, LLC, which provides financial markets analysis and consulting. His
Elliott Wave analysis appears frequently on sites such as SeekingAlpha, where he
is a certified contributor, and
TheTechTrader.com with Harry Boxer.

The June Swoon seems to still be on schedule, but late June may now be the target time, rather than earlier. For now, we are expecting a local top this coming week, with up/down action over the next month, while the market moves higher within a topping pattern by early summer. But the next larger correction we expect this summer will likely set up a sizeable rally as we head toward 2014.

Recently, market enthusiasts saw the following poor economic reports, while the market headed higher and higher, which left them scratching their heads.

In the U.S., only 165,000 jobs added

The ISM non-manufacturing declined to 53.1

Manufacturing ISM declined to 50.7 from 51.3

Euro-zone manufacturing PMI for April declined to 46.7 from 46.8

European Union retail sales fell by 0.2%

Euro-zone unemployment reported at 12.1%

HSBC China Composite PMI declined to 51.1 from 53.5

Hong Kong PMI fell to 49.9 from 50.5

Some are calling this the "Great Disconnect." Some say that the market is just not trading on fundamentals at this time. However, it is only a disconnect if you feel that fundamentals really drive markets. As we can see right now, this market is not driven by fundamentals or else we would not be rallying on all this "great" economic news. On the other hand, if you view markets in terms of being sentiment driven, there is no disconnect at all.

We use Elliott Wave analysis to track market sentiment, and our current count has us working on the 3rd wave subdivision within a larger 5th wave from the November 2012 lows. This means that as we move toward the completion of a full 5 wave structure off the November 2012 low, a larger-degree correction will ensue. This is the market swoon which we see coming this summer.

In fact, 5th and final waves, such as the one we are currently tracking, exhibit the almost euphoric sentiment which seems to be currently pervasive among most market participants, in which most market participants are absolutely convinced that the market will not come down.

However, the technical indications in this current rally thus far provide evidence that this last push higher is occurring on weaker technicals than the stronger 3rd wave which topped in March.

Within our current uptrend, my expectation is that we have either completed or are about to complete the grey wave (3) within this green wave (3) of the final 5th wave. This means that we are just about done with the strongest section of this final 5th wave, and the technicals should provide us evidence over the coming weeks of a weakening rally, assuming we are correct with our count.

Therefore, gray wave (4) of green (3) will likely be taking shape this coming week. This means we should expect a decline to begin over the next week, before the next rally phase takes shape.

However, even within the current pattern, with all the extensions we have seen thus far, I have some questions regarding whether gray wave (3) has even completed yet. It is quite possible that it topped at the 1632 E-Mini S&P 500
US:ESM3
target we set earlier this week, as we saw the extension developing within this wave degree.

However, I can still see the possibility of one further extension, which can take us up to the 1639ES region before gray wave (3) completes. But once we have the signal that grey wave (4) is in progress with a break down below 1620ES, we will have a better handle on how the next month will set up the next topping pattern.

As for an ideal target for a top in the market, I misspoke last weekend when I said the 1635 region represented the Fibonacci 1:1 relationship between waves 1 and 5. Wave 1, which began in November 2012 was 105 points. Since this current 5th wave began at 1536, it would mean that the ideal target for this 5th wave would be 1641 in the cash index, with 1666 and 1681 providing 1.236 and 1.382 relationships. And for those of you who like really interesting market phenomena, the 1666 confluence point is exactly 1000 points from the March 2009 low.

Alternatively, if the market is able to move as high as the 1644ES level this week before it pulls back in gray wave (4), I will modify my count to provide for this as wave iii of green (3) rather than as an extended wave v in green wave (3), which has market implications as high as the 1689ES level before this final 5th wave completes. And, if that is the case, then a pullback over the next week from 1644ES to the 1617/20ES region would be a buying opportunity for the wave v of (3) rally targeting the 1666ES region.

So, please remember, we are dealing with non-linear markets, and all I do is try to set a road map to guide you along the way. Based upon how the market actually reacts early this coming week, we should be able to narrow down the possibilities presented in this analysis, which will allow us to better focus on the remaining sections of the pattern over the next four to six weeks.

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